Asian companies are quickly becoming global players. The UNCTAD recently compiled a list of the hundred largest multinationals from developing economies, and firms from most of the larger Southeast Asian nations were represented, including Malaysia, Thailand, Singapore and the Philippines -- but not Indonesia. Indonesian companies are lagging behind in the globalization trend.
One reason is the peculiar public opinion in the domestic market. When firms from the U.S., Europe, or Japan invest abroad, people are proud of "their" multinationals, which are reaping successes globally. However, if Indonesian firms invest abroad, their actions are quickly labeled as capital flight, in particular if the company is run by a family of Chinese descent (many large domestic firms fall in this category) -- whose loyalties tend to be questioned when they invest abroad.
The Indonesian government does little to stimulate firms to go abroad. This is in contrast to the Chinese government, which actively supports its home-bred multinationals to be successful in global markets.
Some Indonesian conglomerates do have extensive investments abroad, but these are "hidden" in other jurisdictions to avoid public scrutiny, and for tax reasons. If anyone criticizes these investments, the groups are quick to point out that the money for these investments did not come from Indonesia.
Often, Indonesian businessmen use nominees or complex legal structures to obscure ownership. This is the second reason why Indonesian firms did not make it into the top-100: Their overseas investments are hard to track.
Labeling investments abroad as capital flight is not correct. First, capital flight is normally associated with investments in monetary instruments (shares, securities) which can be liquidated and withdrawn from a country easily. However, when an Indonesian firm builds a factory abroad, it is a long term investment which cannot easily be liquidated, and therefore using the term capital flight is confusing.
Second, capital flight implies that the phenomenon is negative. The logic is: whatever funds are invested abroad cannot be invested at home, and therefore it is a flight of money. This argument assumes that it is "either -- or". Either you invest abroad or locally. Either you create jobs at home or abroad.
Although this line of thinking used to be popular, few experts agree with it any more. In most countries, outward investment has multiple effects, some of them indirect. Experts now think that the net effect tends to be positive.
What are the positive effects of local firms investing abroad? The main advantages lie in the profits, capabilities and knowledge that local firms gain abroad, some of which are brought back to the home market.
A Canadian professor, Donald Lecraw, did research in the early 1990s and concluded that Indonesian firms that had invested overseas had improved their performance after investing abroad, in terms of management expertise, exports, quality and cost structure.
Improving firms' competitiveness evidently benefits consumers if the cost improvements translate into lower prices. Usually, improvements in one firm may affect other firms operating in the same industry, and the level of the whole industry may be raised if firms bring back better practices learnt abroad.
If more Indonesian managers become expatriates, and bring back and spread their knowledge at home, this will translate in improvements of the labor market. The benefits of higher quality products, services, and governance through exposure to more advanced global markets also seem clear, especially if these better practices also affect surrounding stakeholders such as universities, laboratories, banks, etc.
The increased profitability of firms that have an international outlook directly translates into more tax revenues for the government. All the effects mentioned are positive spill-over effects of outward investments to the home economy.
In the face of all these advantages, why would one not stimulate Indonesian companies to invest abroad? As mentioned, there are also downside risks to outflows of investment. If local firms become more competitive, but do not bring back their knowledge to the local market, and instead run their foreign operations without links with the home market, then positive spill-over effects likely will not spread to employees, industries, suppliers and the government budget.
This is exactly what seems to be happening. Several conglomerates coordinate their international businesses out of Singapore or Hong Kong, with limited connections to activities in Indonesia. Given the negative publicity of being called unpatriotic, it is not surprising that Indonesia's conglomerates tend to separate their local and international investments.
The question is not whether or not we want local firms to invest abroad. The trend is already happening, and there is little the government can do to stop global investment flows, especially in an open economy. The question should instead be: what can we do to reap the maximum benefit from outward investments for the country?
Politicians are advised to stimulate local firms to invest abroad, as the net effect on the local economy is positive, as long as the government creates the conditions for firms to repatriate their money, knowledge and capabilities.
Business leaders should be free to invest abroad, but should also bring back and spread what they have learned to Indonesia, in order to raise the level of competitiveness of people, companies, industries and surrounding players. Businessmen and women investing abroad and bringing home increased competitiveness are the real patriots.
Dr. Marleen Dieleman is visiting fellow with NUS Business School in Singapore. She is the author of a book on the Salim Group entitled The Rhythm of Strategy, and can be reached at marleendieleman@hotmail.com
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